* Poland losing favour, Hungary gaining
* Spectre of 'twin deficit' unsettles Poland investors
* Hungary getting benefit of doubt on controversial reforms
By Caroline Copley
LONDON, April 14 (Reuters) - Lingering doubts over the quality of its trade data and a persistent failure to adopt rigorous fiscal reforms could keep Poland's investment prospects clouded -- possibly to the benefit of regional peer Hungary.
Though the Polish zloty has rebounded from recent lows against the euro and the Hungarian forint, investors are increasingly adopting a view that Hungary is becoming a better medium term bet than Poland.
It is already noticeable on their stock markets.
Shares in Budapest <.BUX> have risen more than 12 percent this year, dwarfing Warsaw's 6 percent, despite the latter's push towards the privatisation of state assets and efforts to help fund the budget with extra corporate taxation.
"In the regional beauty contest, Poland is losing its top spot. Poland had been doing well going into the financial crisis but a lot of complacency has set in," said Lars Christensen, chief emerging markets analyst at Danske Bank in Copenhagen.
"There's an underlying deterioration in Polish fundamentals and an underlying improvement in Hungarian fundamentals." ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic comparing Polish and Hungarian CDS:
http://r.reuters.com/hug98r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Continued confusion over the size of the Poland's current account deficit -- a central bank official has warned a revision of the balance of payments data could increase the current account deficit by at least 1 percent of GDP - has crystalised investors' displeasure over the government's complacency in tackling its finances. [ID::nLDE73A0V8]
"There is the issue of large errors in the trade data and also it's running large twin deficits -- that means the zloty will remain undervalued. We were already concerned before the admission," said David Dowsett, who manages $10 billion in emerging market investment at BlueBay Asset Management.
The zloty -- the region's worst performing currency so far this year -- fell almost 10 percent against the forint
MIND THE GAP
A more hawkish tone from Poland's central bank coupled with expectations of more dovish policy from Budapest have prompted some investors to close zloty-forint short positions.
Much of the zloty's losses can be seen as a retracement of a bullish performance last year, and Poland remains the region's most robust economy with lower public debt and a better growth outlook than Hungary.
But Warsaw's plan to issue a June revision of 2010 balance of payments data is unlikely to quell disquiet, already heightened by growing expectations the government will fall short of its pledge to cut its budget deficit to 3 percent of GDP in 2012 from 8 percent now.
"We saw a few recommendations in the street to go long PLNHUF, but we are still not comfortable enough to add PLN exposure amidst the noise around the Polish BoP (balance of payment) dynamics," Luis Costa, Citi analyst said in a note.
This view was echoed by Murat Toprak, emerging markets strategist at HSBC: "There has been a shift in the Polish central bank towards a more hawkish stance but I still wouldn't buy the zloty yet."
Rating agencies have also stepped up the finger-wagging. Fitch and Standard & Poor's have both warned inaction on fiscal reform could lead to negative ratings action for Poland.
Radical cuts to government spending, however, are unlikely until after parliamentary elections in October, especially as the ruling party has only a narrow lead over its rivals. [ID:nLDE737115]
"There will be no real fiscal reform before the elections," said Toprak.
"We haven't seen any real fiscal reform in Poland other than the changes to the pension system, which effectively reduce contributions to private pensions."
BENEFIT OF DOUBT
Hungary, by contrast, is becoming more popular.
Poland's pension reforms were initially received more positively by investors compared with Hungary's pension reforms, which were part of a series of controversial fiscal measures including windfall taxes on sectors such as banking.
But investors are now adopting a wait-and-see approach on the Hungarian measures, which they contrast with the relative absence of Polish initiatives to curb spending.
"Poland is not that bad but at this point Hungary looks much more attractive," said Marten-Jan Bakkum, emerging markets investment strategist at ING Investment Management, who is overweight Hungary.
While Poland's 5-year CDS have stalled at around 142 bps, Hungary's have tightened to 249 basis points from 388 bps at the start of the year.
Hoping to capitalise on this shift in sentiment, Hungary said this week it plans a roadshow with European investors with a view to possibly issuing a euro-denominated foreign currency bond to cover the remainder of its financing costs this year.
Recent 10- and 30-year dollar bond sales from Hungary in the past month have seen strong demand in global markets, though Poland also said on Thursday it planned a dollar bond.
"The biggest turnaround story in central Europe is (Hungary). We were cautious and didn't think the new ... government was serious about meaningful reform but we have changed our view on that this year," BlueBay's Dowsett said. (Additional reporting by Sebastian Tong, Sujata Rao and Carolyn Cohn; graphic by Scott Barber; editing by Patrick Graham)